‘Uncommon’ times continuing to impact cotton prices

China’s cotton production could be down 4 million bales in 2009, a result of the faltering global economy, higher subsidies for grain crops and declining seed cotton prices.

In other times, December cotton futures might have reacted sharply to such projections. But these are “uncommon times” for the world cotton markets, says Gary Adams, vice president for economic and policy analysis with the National Cotton Council.

Instead of climbing higher as they might have in the past, Intercontinental Cotton Exchange futures have again fallen below the U.S. loan rate, primarily due to reductions in Chinese cotton consumption and uncertainty over what will happen to cotton in the state reserves.

“We are projecting a slight increase in Chinese mill use from 46.3 million to 47.2 million bales in the 2008-09 marketing year,” said Adams. (Chinese mill use totaled 51.5 million in 2007.) “We are also forecasting a 2009 Chinese crop of 32.6 million bales, which would be 4 million bales off the 2008 crop (of 36.5 million bales).”

Adams, who gave a presentation on the economic outlook for U.S. cotton at the NCC’s annual meeting in Washington, D.C., said China’s government has said it would purchase up to 12.5 million bales for the state reserves to help support seed cotton prices. More than 8 million bales have been purchased to date.

“The key question is what happens to the cotton in the state reserves,” said Adams. “If China begins to put those bales back on the market, it could have a negative effect on the amount of cotton China imports in 2009.”

For the 2008 crop year, the NCC estimates Chinese imports fell to 6.8 million bales because of the 5-million-bale decline in mill use. For 2009, the NCC believes imports could recover to 9.7 million bales, based on the smaller production and slight improvement in mill demand.

Adding another element to the uncertainty over the prospects for 2009 is the situation with India’s crop. Indian farmers are expected to produce another large crop of around 23 million bales because of an increase in the country’s minimum support price.

As demand for textile products dwindled and cotton prices began to tumble last fall, India’s government increased the minimum support price it provides its cotton farmers by 35 percent to 45 percent.

“While there is an ongoing debate between the various segments of India’s cotton industry as to the appropriateness of the higher MSP, this outlook assumes that the MSP is maintained for 2009, allowing cotton to remain competitive and tempering any acreage reduction,” the NCC’s Economic Outlook report says.

“Assuming continued yield improvement, India’s cotton production is forecast at 23.4 million bales in 2009. This is roughly 450,000 bales above 2008 and well above their five-year average of 21.5 million bales.”

As is the case with most major cotton-consuming countries, India’s mill consumption is expected to fall to 17.1 million bales in the 2008 marketing year. That would be down 1.2 million bales from the 2007 estimate.

“There will only be slight improvement in India’s cotton consumption for the 2009 marketing year,” the report said. “Due to the global slowdown, industry sources report most mills are scaling back consumption due to weak demand for textile products, both globally and domestically. The global recession should keep India’s consumption at 17.5 million bales.”

India’s export prospects have also weakened with 2008 marketing year shipments falling by more than 3 million bales to 4 million due to lower international prices and its higher domestic levels created by the increase in the MSP.

Nevertheless, India will remain a major player in the Far East cotton trade. Since the 2006 crop year, India has been the second largest exporter behind the United States. For the 2009 marketing year, India is expected to rebound to near 2007 marketing year levels with exports of 7.0 million bales.

“India’s export prospects are complicated by their decision to increase the MSP,” says Adams. “With the MSP above current market prices, the Indian government has authorization to purchase up to 11.7 million bales, and total stocks are estimated to reach 9.7 million bales by July 31.

“The uncertainty centers on the extent to which India’s government releases those stocks into the marketing channels. Current reports indicate that cotton is currently being sold from their stocks to Indian mills. A decision to be more aggressive with stock release into export channels could boost their presence in the world market, but at current prices, would carry a high cost.”

How soon world cotton prices return to those higher levels needed to attract more U.S. acres depends on how soon functionality can be returned to the financial markets and the success of efforts to unclog the capital markets.

“The intricate linkages between the cotton market, other commodity markets and the general economy have never been more evident,” said Adams. “Pessimism over faltering fiber demand and reduced trade is overriding lower production, resulting in weak cotton prices.

“One indication of the growing concern is the steady lowering of the 2008 marketing year global mill use estimate of more than 10 percent by most sources. The combination of lower production, use and price defining the 2008 marketing year is an uncommon occurrence with only one previous instance during the last three decades (in 1998).”

Adams said predictions that recovery could begin in the last quarter of 2009 could be good news for cotton producers.